As development is a dynamic process, important factors associated with that process, such as population growth, the presence of a large number of guest workers, and the phenomenal industrial growth, have begun to place a strain on many segments of the kingdom’s basic physical infrastructure. This situation coincides with tightened government spending resulting from reduced income. As a consequence, much of the new expansion will have to be financed to a large extent by the private sector, and the resulting services will have to be paid for by the users. This expectation is in harmony with the strategic objectives of the sixth development plan which calls, among other things, for:
continued encouragement of private sector participation in socio-economic development;
continued restructuring of the kingdom’s economy through diversification of the economic base, particularly through emphasising industry;
completion of infrastructure projects necessary to achieve overall development, and achievement of economic and social integration among the GCC countries.
To achieve the objective of increasing the role of the private sector in the national economy, the government has announced several guidelines.
The most important ones of which are:
Attract foreign investment in joint ventures or individually in large capital-intensive projects that use advanced technology.
Expand the utilisation of private sector capital in financing more and more government projects.
Expand the offset programme to include large civilian projects, while ensuring that projects under this programme make effective contribution to the transfer of advanced technology and the development of Saudi manpower.
Future infrastructure expansion
Within these guidelines, new expansion projects are being planned:
Further expansion of the telecommunication sector is now being implemented with the addition of 1.5 million new lines and 200,000 subscribed mobile system. The cost of this project is more than SR 15,750 million ($4,200 million). This expansion project is the first large civilian project to incorporate an offset programme component.
Saudi Arabian Airlines fleet modernisation is underway with the recent SR 28,000 million ($7,500 million) order for new aircraft.
The infrastructure in both Jubail and Yanbu are now saturated. During the next seven years, the expected expansion in the industrial infrastructure in these two cities alone is as follows:
Increased production of desalinated water from 192,000 cubic metres a day (cm/d) to 351,000 cm/d.
Increase of seawater cooling capacity from 530,000 cubic metres an hour (cm/h) to 1,053,000 cm/h.
Increase of industrial sewage from 48,000 cm/d to 91,000 cm/d.
Increase in electric power from 1,700 MW to 4,065 MW.
The expected cost of such expansion in Jubail and Yanbu falls in the range of SR 6,000 million-8,000 million ($1,600 million2,130 million). In fact, the need for such an expansion in the infrastructure is so urgent that some new projects and extensions of many existing ones are solely dependent on it.
The situation in the other eight industrial estates all over the kingdom is similar.
It has been forecast that the electric power will increase from about 20,000 MW in 1995 to about 28,000 MW in 2000 and to about 59,000 MW in 2020. With a country as widespread as Saudi Arabia, this demand forecast translates into extensive generation, transmission, and distribution facilities to bring the electric energy to the final user.
The cost for these facilities is estimated to be around SR 138,000 million ($36,800 million) during 1995-2000 and SR 80,000 million ($21,300 million) during 2001-2005, and a total investment of about SR 438,000 million ($117,000 million) up to 2020.
What is needed-the elements?
From the above examples, it is clear that the finance requirements, and consequently the private sector business opportunities, are enormous. The question of the source of finance is much easier to answer than the question of how to finance.
The existing liquidity of the Saudi private sector is estimated to be SR 150,000 million ($40,000 million). So, there is no shortage of money. Investors always focus on two fundamental factors: profitability of the venture and security of their investment. By and large, profitability of a venture may easily be determined, especially in the free market economies of the GCC. However, security of the investment often involves the government and its agencies. The record of Saudi Arabia and other GCC countries in ensuring the safety of foreign capital is impeccable. In fact, Saudi Arabia’s industrialisation is hailed worldwide as a model for ideal joint venturing. This also applies to the Saudi private sector. This leads to a situation in which we have a world flush with capital, investors looking for opportunities and proven partners looking for funds. The picture that emerges is a very positive one. The more difficult question is regarding the modality of financing.
What is needed-the modality?
The build-operate-transfer (BOT) mode of financing has been hailed as the standard financing scheme for executing physical infrastructure. Indeed, many developing countries have gained more experience than developed countries in utilising this funding method. We in Saudi Arabia are considering this route for some infrastructure expansion such as construction of roads. However, we are also experimenting with other modalities of financing. I give some examples:
The Royal Commission for Jubail & Yanbu is proposing the formation of a utility company to operate, maintain, and expand the existing utilities to meet the Royal Commission demand forecasts for the industries and the communities in Jubail and Yanbu. Services will be rendered on a commercial basis. The new company plans to borrow funds for the utility projects, which will be paid back through revenues guaranteed by the utilities themselves. The partners in this company may include industrial establishments in both cities as well as private investors, both national and international. Partners may themselves take equity positions in this utility company.
A power plant already under construction near Riyadh will have generation capacity of 1,200 MW. To assist in the financing of Power Plant 9 and other utility expansion projects, a special consumer charge of five halloos per kW hour for consumption in excess of 2,000 kW hour per month is being imposed. Additionally, payments have been spread over six years, although the project is slated to be completed within three-and-a-half years.
The financing scheme of the 2,400-MW expansion of the Ghazlan power plant is being discussed. Interest from regional as well as international financing institutions has been very impressive and more encouraging than otherwise reported.
I believe that in Saudi Arabia we will be exploring more models for financing infrastructure projects and learning from the experience of other countries, while at the same time knowing well that each case has its own peculiarities that may dictate the choice of financing model.